Higher Provisioning of Microfinance Companies Might Signal Bad Loans and Defaults but the Rise in Profitability Says Something Else

Every economic downturn has a negative impact on financial institutions. During the Covid crisis, challenges arose for microfinance companies because of the nature of the business. They provide uncollateralized loans to their customers which could lead to huge losses for the industry if the loans default. During the second quarter of FY 2077/2078, microfinance companies had enough provision in their books to affect the bottom line. 

Talking about the second quarter, a lot of companies have created a huge provision but also written back a fair amount of provisions which has somewhat positively impacted their profitability.

So, let’s dissect the major indicators of the second quarter of all the microfinance companies.

Net Profit:

Chhimek Laghubitta Bittiya Sanstha Limited (CBBL) has reported the highest net profit in this quarter with a total of Rs. 61.54 crores. CBBL is followed by Deprosc Laghubitta Bittiya Sanstha Limited (DDBL) which has reported a total of Rs. 32.40 crores. Sana Kisan Laghubitta Bittiya Sanstha Limited (SKBBL) has secured the third position with a net profit of Rs. 31.73 crores.

In this quarter 7 companies have reported a decline in their net profit as compared to the corresponding quarter of the previous year.

Provision:

As per Q2 of FY 2077/2078, Aarambha Chautari Laghubitta Bittiya Sanstha Limited (ACLBSL) seems to have not created a provision account. When we observe the loans of the company, it doesn’t have disbursed many loans which might be a reason for lower/no provision. 

The highest provision is created by Deprosc Laghubitta Bittiya Sanstha Limited (DDBL) amounting to Rs. 1.40 Arba.

Paid-Up Capital:

In terms of paid-up capital, Chhimek Laghubitta Bittiya Sanstha Limited (CBBL) and Nirdhan Utthan Laghubitta Bittiya Sanstha Limited (NUBL) has reported the highest paid-up capital amounting to Rs. 1.83 Arba and 1.50 Arba respectively. This is followed by NIC Asia Laghubitta Bittiya Sanstha Limited (NICLBSL) with a paid-up capital of Rs. 1.48 Arba.

The lowest paid-up capital is reported by Ghodadhodi Laghubitta Bittiya Sanstha Limited (GGBSL) amounting to Rs. 2.76 crores.

Reserve & Surplus:

Nirdhan Utthan Laghubitta Bittiya Sanstha Limited (NUBL) has reported the highest amount of reserve amounting to Rs. 2.88 Arba. This is followed by Chhimek Laghubitta Bittiya Sanstha Limited (CBBL) which has reported a reserve of Rs. 2.61 Arba. Sana Kisan Laghubitta Bittiya Sanstha Limited (SKBBL) has reported a reserve of Rs. 2.00 Arba securing the third position.

Ghodaghodi Laghubitta Bittiya Sanstha Limited (GGBSL) has reported negative reserve.

Borrowings:

Other than equity source and deposit, borrowing is also one of the major sources of funds for microfinance.

Sana Kisan Laghubitta Bittiya Sanstha Limited (SKBBL) has the highest amount of borrowings which amounts to Rs. 18.46 Arba. Forward Microfinance Laghubitta Bittiya Sanstha Limited (FOWAD) has the second-highest borrowings amounting to Rs. 8.77 Arba. Similarly, NIC Asia Laghubitta Bittiya Sanstha Limited (NICLBSL) has the third-highest borrowings with a total of Rs. 8.51 Arba.

Deposit:

In terms of Deposit, Chhimek Laghubitta Bittiya Sanstha Limited (CBBL) has collected the highest amount of deposit from its customers which amount to Rs. 20.86 Arba. CBBL is followed by Nirdhan Utthan Laghubitta Bittiya Sanstha Limited (NUBL) with a total deposit of Rs. 14.70 Arba. Similarly, Swabalamban Laghubitta Bittiya Sanstha Limited (SWBBL) has the third-highest deposit which amounts to Rs. 10.10 Arba.

Among all microfinance, 4 companies has no deposit in its books. The company has been disbursing loans from borrowings and equity financing.

Loans and Advances:

As of the second quarter of the fiscal year 2077/2078, Chhimek Laghubitta Bittiya Sanstha Limited (CBBL) has disbursed the highest amount of loans to its customers which amounts to Rs. 25.29 Arba. Similarly, Nirdhan Utthan Laghubitta Bittiya Sanstha Limited (NUBL) has reported the 2^nd highest amount of loan amounting to Rs. 22.94 Arba.

Till this quarter of Fiscal year, a total of Rs. 2.73 Kharba of loan has been disbursed by all the microfinance combined.

Net Interest Income:

In terms, of Net interest income, Nirdhan Utthan Laghubitta Bittiya Sanstha Limited (NUBL) has earned the highest net interest income with a total of Rs. 1.03 Arba in this quarter. NUBL is followed by Chhimek Laghubitta Bittiya Sanstha Limited (CBBL) which has earned a total of Rs. 98.41 crores. Similarly, Deprosc Laghubitta Bittiya Sanstha Limited (DDBL) has earned a net interest income of Rs. 66.14 crores.

The industry average net interest income stood at Rs. 20.84 crores.

Earnings per share (Annualized):

As of the second quarter, National Microfinance Laghubitta Bittiya Sanstha Limited (NMFBS) has reported the highest number of earnings per share of Rs. 101.62 per share. Forward Microfinance Laghubitta Bittiya Sanstha Limited (FOWAD) has reported the second-highest eps of Rs. 89.93 per share. Similarly, Swadeshi Laghubitta Bittiya Sanstha Limited (SDESI) has reported an EPS of Rs. 87.13 per share.

The average EPS of the industry stood at Rs. 41.78 per share.

Net worth per share:

In terms of Net worth per share, Forward Microfinance Laghubitta Bittiya Sanstha Limited (FOWAD) has reported the highest number with Rs. 320.39 per share. This is followed by Swabalamban Laghubitta Bittiya Sanstha Limited (SWBBL) with a net worth per share of Rs. 293.32 per share. Similarly, Nirdhan Utthan Laghubitta Bittiya Sanstha Limited (NUBL) has reported a net worth per share of Rs. 292.62 per share.

Out of 50 microfinance, 31 companies have reported below industry average net worth per share of Rs. 174.03 per share.

Non-performing loan:

In terms of the non-performing loans, First Microfinance Laghubitta Bittiya Sanstha Limited (FMDBL) has reported NPL of 0.00%. RMDC Laghubitta Bittiya Sanstha Limited (RMDC) has reported an NPL of 0.06%. This is followed by Deprosc Laghubitta Bittiya Sanstha Limited (DDBL) with an NPL of 0.62%.

The highest NPL is reported by Nirdhan Utthan Laghubitta Bittiya Sanstha Limited (NUBL) with an NPL of 15.15%.

Capital Adequacy Ratio:

RMDC Laghubitta Bittiya Sanstha Limited (RMDC) has the highest CAR of 23.63%. This is followed by NIC Asia Laghubitta Bittiya Sanstha Limited (NICLBSL) with a CAR of 21.17%. RSDC Laghubitta Bittiya Sanstha Limited (RSDC) has reported a CAR of 20.26%.

Price to Earnings Ratio:

In terms of price to earnings, Swadeshi Laghubitta Bittiya Sanstha Limited (SDESI) has the lowest P/E of 9.18 times followed by Adhikhola Laghubitta Bittiya Sanstha Limited (AKBSL) with a P/E ratio of 12.90 times. Nepal Agro Laghubitta Bittiya Sanstha Limited (NAGRO) has a P/E of 14.38 times.

The average P/E for the industry stood at 36.25 times. Out of all companies, 34 companies have reported a P/E below industry average in this quarter.

NOTE: Investors are requested to consider the current market price to calculate the latest P/E rather than using the P/E mentioned in the above chart for an investment decision.

In a Nutshell:

Wrapping Up

Every sector was affected by the pandemic and the months-long lockdown that followed. It seems that microfinance companies weren't spared either, obviously. The reports indicate a surge in the Provisions of microfinance companies. The instruction of Nepal Rastra Bank requires microfinance companies to allocate more in Provisions if the probable instances of bad loans and defaults are high. Nonetheless, microfinance companies are known to have a higher risk: higher reward distribution of investment. Since that is the case, one can hope that the microfinance companies will at least try to save the bad loan and defaults, fingers crossed.

On the other hand, the microfinance companies have reported a rise in profitability during such an uncertain time. While one might expect that companies would barely manage their losses when a virus that shook the world affected business, the promising rise in profitability is arguably the light in the tunnel that investors had hoped for.